Friday, June 1, 2012

Hayek once wrote of Richard Cantillon: "In economics, just as in other sciences, it is by no means an
exceptional occurrence to find that, no sooner has a "new" doctrine made
its mark, than earlier, completely forgotten writers are discovered who
perceived those newly accepted ideas with brilliant insight in their
own day and set them down in their writings."

Unlearningecon points out that another example of this can be found in a recent post by Scott Sumner. Of course, the same can be said of Keynes. Keynes just does us the service of citing and even celebrating all the older thinkers that made similar points.

Unlearningecon also points out the supreme irony of all this: Scott Sumner is on record talking about how he doesn't think Keynes makes very much sense and doesn't care to read him. Hmmmm. Anyway, you all know by now what I think of the quality of Sumner's discussions of Keynes, Keynesianism, and Keynesians.

I think that's right. Not full employment means people want income to exchange for goods and services that they are not getting, which means that potential expenditures are not being met, which means that potential income is not being met.

It's a little tougher to make the same airtight case for NGDP rather than RGDP, but I think it works enough to convince most of us.

Aside from a little frictional unemployment, I can't conceive of a situation where we would have unemployment but not be below output potential.

I should like to hear a Keynesian tell us exactly how much stimulus we need to get out of this slump.

When Krugman made his famous comment about the alien invasion threat allowing unlimited government spending, which in turn would end this slump in 18 months, he failed to say how much spending would be enough. Would 1 trillion suffice? 5 trillion? 10 trillion?

It seems that no matter how many trillions are spent and how many more are printed, the stimulus is never enough.

Daniel Kuehn said earlier that Krugman was right about almost everything he said, including the alien comment.

Well then, why hasn't Krugman told us the the minimum amount of stimulus that we need? He obviously must know it, since he knew that the spending to avert the alien threat would be enough to get us out of the slump in 18 months. So what is the figure and what exactly is it based on?

1. I don't know why you expect us to know exactly how much. You seem to think every situation is identical or that we can predict the way the economy goes, or that we can know exactly how a given implementation of stimulus in turn reduces private investment (clearly many kinds will). In other words, the whole premise of your expectation seems riddled with errors to me.

2. One can, of course, come up with estimates. Krugman has given an estimate - if I recall it was 1.2 trillion in 2009. Instead we got around 800 billion spread out across 2009, 2010, and I believe even into 2011. But I can't emphasize enough how shaky your assumptions are, Kaj. It's not as if you can do stimulus and solve all your problems. We have a troubled banking system and balance sheet issues that go well beyond the national income issues. Not to mention trouble in the rest of the world rippling over here.

Hayek: "In economics, just as in other sciences, it is by no means an exceptional occurrence to find that, no sooner has a "new" doctrine made its mark, than earlier, completely forgotten writers are discovered who perceived those newly accepted ideas with brilliant insight in their own day and set them down in their writings."

Right. Like the writers on phlogiston and ash had many brilliant insights to add to the discussion of modern chemistry. And modern doctors could learn useful things by studying the humors. A lot of the pseudoscience of today is the science of yesteryear. This statement by Hayek raises my BS meter reading.

P.S. the riposte that full employment and NGDP are really very different doesn't work

Yes I think it works just fine. Sumner didn't invent the idea of full employment or nominal spending, but he talks about why focusing on a steady and predictable increase in NGDP will knock out major reasons for recessions. (I think he's nuts, btw.) This is not at ALL what Keynes is saying in that quotation Unlearningecon provided, unless you plug into Keynes' reasoning the entire Sumnerian mechanism.

Sumner's whole contribution (and he didn't invent it, as he is the first to admit) is to explain why full employment and NGDP could be related. That relationship is not in the Keynes' quote, and it also doesn't pop out of saying "'Effective demand' is Keynes' term."

I hope my Sumner-bashing street cred is high enough that I don't need to say that my comment comes from sincerity and not a desire to bash Keynes.

The fact that the two frame it differently doesn't disguise that the functional approach is incredibly similar.

Keynes: "If we lower the rate of interest, and hence aggregate demand is at a level sufficient to maintain full employment given potential output constraints, the 'special case' of classical theory becomes useful."

Sumner: "If we maintain a constant level of nominal spending then the fundamentals of the economy - including employment - will only reflect constraints in supply rather than demand, and hence the economy becomes classical in nature."

It seems like a commenter of mine nailed it:

"Here I see a dynamic whereby a difference in framing is made to appear as a revolutionary discovery."

"I define the simplified version of the Sumner Critique as follows: If the Central Bank is targeting expected Nominal GDP then all other macroeconomic effects become approximately classical in nature."

"But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards."

Both of them are focused on making insufficient aggregate demand a non-issue. The difference? Sumner is constantly criticising the fed itself for not maintaining it; Keynes was criticisng the market system for requiring the intervention in the first place. People have pointed out that the difference between Friedman and Keynes was mostly technical, but ideology obscured that truth. I see something similar here.

To be honest, if Keynes had been less ambiguous and used 'long term rates' instead, the analysis would look similar to the point of being interchangeable.

OK not trying to be a jerk, Unlearningecon, but that's why I asked: The actual quotes don't sound like each other, whereas when you paraphrased they *did* sound sorta similar. But looking at the actual quotes, no, those aren't the same things at all.

Keynes is saying that if the central gov't establishes NGDP to achieve full employment, then we have the classical world.

Sumner is saying that if the central gov't targets a steady growth of NGDP, then we'll have full employment and hence classical world.

So Keynes is saying *how* to manage NGDP; he's just saying (in that quote) to make it achieve full employment.

That's the crucial thing about Sumner; it's what makes him Sumner. If you're saying, "Sumner is basically just talking about manipulating aggregate demand to achieve full employment, and hence he's a Keynesian," then OK fair enough. But that's a silly claim because Sumner is saying a lot more than that: He is saying *the specific way* to manipulate AD is to target a steadily increasing level of NGDP, come hell or high water.

I'm exaggerating here to make a point, but I could say, "There's nothing new in Garrison that wasn't in Keynes. Both of them think the gov't should institute policies that promote prosperity." If you can see why *that* would be a ridiculous thing to say, then you can understand why I don't think you're being fair to Sumner here. (Admittedly, my example is way more absurd than what you are doing with Sumner and Keynes.)

Krugman said that the slump would be over in 18 months if the government was just allowed to spend as much as it wanted on military build-up(because as we all know, more military spending is just what we need).

How could he make that claim without having any clue how much spending was needed? How could he know how much the government would spend given the chance?

This is the problem with Keynesians. They pretend to know the answer, but bolt at the first question. Like you did now.

"You seem to think every situation is identical or that we can predict the way the economy goes, or that we can know exactly how a given implementation of stimulus in turn reduces private investment (clearly many kinds will)."

No Daniel, this what YOU Keynesians do. What you say here is exactly the argument AUSTRIANS level against you. The economy always changes, it is impossible to predict more than very general trends and even given many things equal. And given this fact, it makes Krugman's claim all the more outragous.

"In other words, the whole premise of your expectation seems riddled with errors to me."

Again Daniel, it is YOUR premise (or Krugman's in this case) that is riddled with errors, because his alien-claim was based on the ability to calculate how much and what sort of spending would get the US out of the slump in 18 months.

May I say it is fairly telling that you can't distinguish between your own idol's premises and the Austrian arguments against that very premise?

Bush enaced a 700 billion plus stimulus program and Obama did the same, but more. Obama has been running trillion plus deficits every year. Yet you claim that we didn't get more than 800 billion over 2009, 2010 and 2011. Maybe you should check the numbers again.

Then you suggest that 1.2 Trillion in 2009 would have done the trick. Based on what exactly? What was this estimate based on? Why would a 1.2 trillion stimulus in 2009 have pulled the economy into a path of sustained real growth? Do you have any answers for these questions or was Krugman merely spitballing like he usually does?

"But I can't emphasize enough how shaky your assumptions are, Kaj. It's not as if you can do stimulus and solve all your problems."

For heaven's sake Daniel, you sound like an Austrian :)

And again, is not ME who is saying this. KRUGMAN said it and you said he was right about it, but like him, you've faild to explain why.

"We have a troubled banking system and balance sheet issues that go well beyond the national income issues. Not to mention trouble in the rest of the world rippling over here."

Pardon me, Daniel, but I really don't think either your or Krguman know very much about banks and their balance sheets, or any balance sheets for that matter.

Clearly its not my premise. Kaj, you're like a bunch of other Austrians I've already come across. Instead of being interested in a discussion about Keynesian economics, you want to tell me what position you want me to defend. I don't have time for that.

again, this was Krugman's position and you yourself said he was right. You defended his alien-claim, so Krugman's position is now yours too.

So please, if you would, answer the questions I posed to you:

Why would a 1.2 trillion stimulus in 2009 have pulled the economy onto a path of sustained real growth?

How do you calculate this estimate, i.e. what factors are taken into account when coming up with the estimate? What is the reasoning behind it? What goes into the calculations?

And I repeat, YOU defended Krugman's alien-claim. YOU said he was right about it, so his position became yours.Why do you think he was right in what he said?

You see Daniel, when I say that I think the Austrians were right about something, I have to be able to say why I think that. The same goes for you.

I'm very interested in discussion Keynesian econimcs. I'm trying to understand one of the core pricniples of Keynesian economics here: the virtues of stimulus spending and how the correct amounts are calculated. That is why I'm very much looking forward to your answers.

I don't think there are many parts one can agree with of the General Theory. However, considering the recent debate on Krugman's alien claim and Daniel's refusal to explain his own position, this particular quote may be the one that takes the cake:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." (p. 129)"

Here is the same idea as Krugman's alien claim. Massive amounts of spending to end unemployment, which would then make everything better. Notice how Keynes at no point ever indicated how much spending would be needed or where the money would come from, like Krugman.

Since Daniel won't defend his, Krugman's or Keynes position nor answer any questions related to it, maybe you can? Do you agree with Keynes here? Do you, like Daniel, think Krugman was right in his alien claim? If yes, maybe you can answer the questions Daniel left unanswered.